Many people wonder what the difference is between a conventional loan and an FHA loan. What are the benefits of each? Which one should you choose for your next mortgage? There are many things to consider in this decision. Still, hopefully, this post will help clarify the difference between conventional loan versus fha loan to make it easier for you to decide which type of loan is best suited for your needs.
What Is a Conventional Loan?
A conventional loan is a form of mortgage in which the borrower must meet specific underwriting parameters and eligibility criteria. To qualify for a conventional loan, borrowers must provide capital, such as money from their savings accounts, 401k accounts, or other investments. Fixed-rate mortgages, which have a fixed interest rate for the life of the loan, are the most common type of conventional credit.
An adjustable-rate mortgage (ARM) is another popular option, with a lower starting interest rate that may climb after a set length of time.
What Is FHA Loan?
A Federal Housing Administration (FHA) loan is insured by the federal government and offered through private lenders. These loans are designed for low-to-moderate income borrowers who may not otherwise qualify for a mortgage due to credit history, down payment amount, or other factors.
The FHA loans are available in fixed-rate and adjustable-rate mortgages and offer a low down payment of as little as three percent. Borrowers must pay mortgage insurance premiums, but you can cancel these after the loan has been paid for five years. FHA loans are popular among first-time home buyers and those with credit challenges.
Benefits of Conventional and FHA Loan
Conventional Loans have a lower minimum down payment than an FHA mortgage. With conventional loans, borrowers can finance up to 97% of their home value and still get the benefits of PMI insurance (as long as they meet specific credit requirements). If you don’t want or need to put down 20% on a home purchase, a conventional loan is likely your best bet.
On the other hand, FHA Loans allow for a low down payment of just three and a half percent. So if you don’t have quite as much saved up for a down payment, or you’re buying in an area where homes are expensive, an FHA loan could be a good option for you.
The FHA loan is better for people with less than perfect credit. It may also be the only option available to those with limited income or minimal down payment funds. The conventional loan can typically help borrowers get a lower interest rate. It doesn’t require mortgage insurance, which means you don’t have to pay an added fee each month as long as your lending institution requires private mortgage insurance on loans they provide. If you’re not sure if one type will work out better for you, we recommend discussing options with our team so that we can find the right solution for your specific needs!